HEY, CORPORATIONS: Pay. Your. People. More. Money!

It's a crisis where no one has — or is using — their cash to buy
all the stuff we sell to each other around the world.

The thing is, there's a clear solution to this problem!

American corporations, which are sitting on a
$1.8 trillion pile of cash they don't know what to do with,
need to raise wages, and American consumers need to start
spending more money.

You see, what the world is missing is demand. The more people
with purchasing power, the more demand we have.

I'm not saying companies should raise wages because it's "fair."
Business people hate that word.

I'm saying companies should do it because what they've been doing
with their cash —
stock buybacks at a record rate — clearly hasn't been doing
anything to help kick the economy into the gear it needs to
be be in.

I'm saying that companies should raise wages because the global
economy — the market itself — is calling for it.

How do I know this? A couple of key things are tipping me off.

Why we need it

Christine Lagarde, head of the International Monetary Fund, has
said that global growth will be "disappointing" this year.
Countries like Brazil, Nigeria, and South Africa, which used the
last decade's commodities boom to turn poor citizens into
consumers, are going into deep recessions.

Federal
Reserve Chairman Janet Yellen.Mark
Wilson/Getty Images

Here in the US, Federal Reserve Chair Janet Yellen has said that
she's watching global demand and international markets to figure
out whether or not to hike interest rates.

The big tell, though, is China's slowdown and the volatility
coming out of that.

The markets have been getting totally rocked by the depreciation
of the Chinese yuan. No one explains it as well as economist
Michael Pettis.
In a recent post on his site, he went through everything
that's challenging the Chinese economy. Chief among these issues
is debt and overcapacity.

In short, the second-largest economy in the world has a ton of
stuff no one wants to buy. Meanwhile, the debt collectors are
calling.

What China needs, Pettis argues, is debt-free demand.
But "in a world in which demand is likely to remain
weak for many years, the external sector is unlikely to provide
sufficient additional demand," he wrote.

In plain English: China needs somebody to buy all of its
goods.

But it's not just China. All the demand-hungry countries around
the world are going to be looking to the US consumer for a
bailout. That could set off a dangerous competition to make goods
cheap around the world.

From Pettis:

The biggest risk created by the weaker RMB [Chinese yuan],
as I see it however, is not a Chinese risk but rather a global
one. The rest of the world may view recent Chinese RMB weakness
as a signal for a new round of competitive devaluations. I have
already said that I expect 2016 to be another bad year for trade,
and I am worried that it seems as if every major economy in the
world has implicitly decided to use US demand to bail out its own
faltering economy. This will very likely derail the US recovery
in 2016 or 2017 unless the US, too, decides to step in and
intervene in trade. If that happened, of course, the impact on
Europe and China would be terrible, but it seems to me a matter
purely of logic that if the hard commodity and energy exporters
are nearing the limits of their absorption capacity, either the
major surplus nations or the US are going to have to absorb a
bigger share of the demand deficiency created in Europe, China,
and Japan.

With higher wages, the American consumer has more money to
spend. It becomes a bigger sponge for all this output.

To be sure, Americans have more money in their pockets due
to falling energy prices. The problem is that they're saving it,
according to
Kathy Jones, Charles Schwab's chief strategist on
credit markets. Behavioral economists will tell you that this is
because paying less at the pump doesn't make Americans feel like
they have more money, so it doesn't change their
behavior.

But you know what does make people feel richer, though?
A raise, baby.

Why we don't have to just sit around and wait for it

Supply-side economic theory, dating back to French 19th-century
economist Jean Baptiste's A Treatise on Political
Economy, says that supply creates demand. When a product is
made, the cost to make that product — paying workers, investment
in production, etc. — creates a market where that product can be
sold.

Of course, there are distortions, and economist Pettis
explains the one that we're dealing with right now:

[I]nstitutional distortions can force agents into systematic
misalignments of supply and demand (mainly by changing incentives
for political reasons) that can get very deep and can persist for
very long periods.

Basically, something about the incentivization for companies to
create products through a process that spurs adequate demand has
been distorted. We can argue about how it happened all we want,
but the point is that these things don't always just take care of
themselves, and the solution in our current case is really just
getting more people to spend money.

Do we have to wait for the slog-through of a significant
global-economic slowdown to force us into action? Looks like it,
unfortunately.

Why we still won't do it anyway

It's not hard to surmise that the government won't be enacting
legislation that entices corporate America to
raise wages anytime soon. Beside the fact that it's
hard to do, 2016 is also an election year, and wages have become
a political issue.

Workers
protest outside a McDonald's on November 10 in Miami, Florida,
for the minimum wage to be raised to $15 an
hour.Joe Raedle/Getty
Images

Corporations also probably won't do it on their own because, with
few exceptions, corporate America has a knee-jerk reaction to
what it should do with excess cash. It's automatic if you watch
channels like CNBC or Bloomberg TV, or read op-eds in The Wall
Street Journal.

"What do you do with excess cash?"

"Return it to shareholders."

This idea has become dogma since the 1980s. Some people even
think that companies have a legal requirement to uphold the
rights of shareholders over workers or anyone else.
That's just untrue.

The real trick is that as the global economy slows down,
corporations get more conservative
and cut jobs. They don't raise wages despite
the fact that a good pay hike would help ignite the global
economy.

Companies can put capital to work in the economy in the form of
buybacks — mostly what happens — dividends, or whatever you like.
But nothing will get the American consumer going like a good
old-fashioned raise. It's what the Federal Reserve has had its
eye on ever since interest rates went to zero. It's the sign that
everything is going to be OK. And wage growth is happening,
albeit slowly. It's just that this global slowdown isn't waiting
for it.

And we don't have to, either. But we act like we have to wait for
wage growth to happen magically. We don't.

Human beings are not just victims of the market — we are actors
in it. When we see it moving in an ugly direction, we should do
everything we can to push it away. As a country, Americans accept
that government has the responsibility to do that — to enact
policies that ensure growth. The private sector should also take
responsibility for that, though, and not just wait for a market
heading to hell to force them to do it. It will
ultimately help them anyway.